Lenders Craft Packages That Smooth Way for Potential Homebuyers

The Post and Courier

Oct. 26--Finding a house she could afford was the hard part for Yvette Williams.

Financing it, on the other hand, was a snap, thanks to changes in the mortgage business that make it easier to qualify for loans but which also raise concerns about terms that may turn out to be unaffordable, especially as interest rates climb.

Under past lending standards, no bank would have touched Williams: Her less-than-stellar credit would have been enough for bankers to turn her away. The fact that she couldn't shell out 20 percent for a down payment would have been another reason for them to say no. And if she had asked about subsidized housing programs, those same bankers would have told her she earned too much to qualify.

"I always considered myself part of the working poor because I made enough to get by but too little to get any assistance," said Williams, an accountant with the U.S. State Department who was recently transferred from the Washington, D.C., area to the department's offices at the former Charleston Naval Shipyard.

"But I was determined to get a home," said the 41-year-old single mother of three. "I wasn't going to pay rent for another year. I was going to make my dream come true."

For Williams and millions of others grasping at the shared American Dream of home ownership, getting into that first home is possible because so many more options exist today than just two decades ago, when choices were limited mainly to 30- and 15-year fixed mortgages.

Nowadays, mortgages are tailor-made for first-time homebuyers, civil servants, doctors straight out of medical school and even those with bad credit. Many require little or no money down and offer a variety of variable interest-rate packages that, unlike fixed rates, move up and down with market rates.

Mike Benke, a loan officer at Carolina First, said there are so many mortgage programs out there right now that "it's hard to keep up with all of them."

"When I started in this business back in the early 1980s, there were just a few ways to go with a mortgage," Benke said. "But all these changes were necessary. Can you imagine having to put down 20 percent on a home today?"

Take the two-story starter home Williams bought in Goose Creek for $148,000. The old rules would have meant she needed $29,600 for a down payment. Thanks to today's more relaxed lending practices, she managed to work out a deal with just 5 percent down, or $7,400.

The proliferation of creative financing packages has been a key factor in helping more Americans afford homes than ever before. According to recent figures, homeownership levels have hit an all-time high of about 69 percent nationwide.

There are a number of reasons behind this trend.

As the information age advances, lenders have gained greater access to personal consumer information, like credit scores, which allow them to assess risk more thoroughly and craft more sophisticated mortgages. Many of these loans have been created by the Federal National Mortgage Association and Federal Home Loan Mortgage Corp., the government-sponsored agencies known as Fannie Mae and Freddie Mac that were established to support the mortgage market.

The creative component built into today's lending practices was evident in the deal Williams struck for her home loan.

Working through a broker, Low Country Mortgage, Williams shopped around and settled on a two-mortgage package to finance her home.

The first mortgage paid for 90 percent of the home and carried a 30-year fixed rate at 8.2 percent, a lot higher than the current market rate of about 5.6 percent. The higher rate is the result of some shaky credit following a divorce that has since been cleaned up.

The second mortgage covered 5 percent of the home and offered a two-year fixed rate at 13 percent. This part of the loan was financed by a private lender, not a bank, and included a "balloon" payment, meaning a big portion of the loan needs to be paid in one lump-sum at the end of the two years.

Even with such flexibility, Williams is planning on tweaking the terms again next year.

"I'll make all the payments, show I'm good with the creditors, and then consolidate the two loans into one and refinance next year," she said. "That's the plan."

Though the growing menu of choices is often praised as a positive development, there are some concerns that homebuyers are making some poor selections and taking on more risk than they should.

Doug Duncan, chief economist at the Mortgage Bankers Association of America, put it this way: "Most agree it's better to have more choice than less. But the one thing it does is raise the premium on being a well-educated consumer."

The popularity of adjustable rate mortgages, or ARMs, which make up about a third of all mortgages these days, underscores this point. People like ARMs because the monthly payments are lower than the fixed-rate alternatives. That's especially true for "interest-only ARMs," in which borrowers have the option of paying just the interest and not any of the principal on the loan.

But there are caveats. As interest rates continue to climb, borrowers with ARMs will get stung by higher monthly payments. ARMs work by locking in a fixed rate for a set period, but when that term ends, the rates adjust to match market conditions.

"In and of themselves, these products are neither good nor bad. They are neutral," Duncan said. "An interest-only is a good loan if you are wealthy or not planning on being in a home for long ... but if you are on a fixed income and are stretched to the max, then you shouldn't be gambling this way."

By making the wrong choice, consumers are essentially mortgaging their futures to mortgage their home, which is a bad tradeoff, said Bernie Mazyck, CEO and president of the Charleston-based South Carolina Association of Community Development Corporations.

"We have to think about how can we get them into a home. But we also have to think about how we can make sure they stay in them," said Mazyck. "We seem to be in a climate now where we are willing to take greater risks to get into a home. Not everyone is cut out to be in a home."

Williams, who scoured the Charleston market for three months before finally finding her home, said Mazyck shouldn't worry about her. "I worked too hard to get this home. I'm here to stay."

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